Decades ago, one of the most popular things you could buy a kid for their birthday, before they knew any better, were savings bonds. As someone who turned thirty just a few years, folks my age and younger probably have a few savings bonds floating out there just waiting to be redeemed. Back then, savings bonds were seen as a good gift because it started children on the road to saving, even if they didn’t know about it. Plus, savings bonds look cool (I think so anyway!).

But as is anything on paper, they’re easy to lose. This is especially true if you’ve moved several times or, in the case of gifts to children, they’re sitting in a folder at your parent’s house. Fortunately, they may be easy to find as long as they are Series E bonds and were issued after 1974 (a small subset, I know, but better than nothing!). The Treasury Department built a Treasury Hunt tool that you can use to look for bonds that have fully matured. Sadly, if they haven’t fully matured or aren’t Series E, the system won’t have it. It’s archaic but it’s the only thing we have and the Treasury has billions in unredeemed fully matured Series E bonds it’s looking to return to owners.
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It doesn’t take a financial genius to notice that it’s tough being a responsible saver these days. Interest rates are low, and have been for a while, that it seems as though there isn’t much difference, outside of FDIC insurance, between opening a CD and stuffing the money in your mattress. The term high yield savings account is comedic… since when was 1.11 of anything considered high?

There are, however, a few options out there for savers with more flexibility in their finances. While the national debt has seemed to take hold in our political discussions, it hasn’t been as prominent in our financial discussions. Treasury debt, such as bonds and bills, has never been a sexy pick for main street savers. It’s about time we gave them a serious look as an option and my favorite of the group is the Series I savings bond.

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It looks like the Series I Savings Bond may be competitive again. After a few pathetically low rate adjustment cycles, we can blame low inflation and the economic recession for that, it seems as though the variable rate for Series I Savings Bonds will once again make them competitive with savings account rates again.

To recap, Series I Savings Bond rates are a combination of a fixed rate, which is for the life of the bond, and a variable rate, which is adjusted for inflation as measured by the CPI-U. The equation itself is a little more complicated but you can use this Series I bond rate calculator to help you do the math (the equation isn’t very hard, it’s just hard to explain).

How are we able to predict the rate in May? Easy, the CPI-U we will use is for March and is announced in April (this time it was April 15th). We simply calculate the change from September 2010 (announced in October 2010) and March 2011 and know what the variable interest rate is.

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With another September come and gone, it’s time to take a look at our good friend, the Series I savings bond. Savings bonds are a nice safe way to diversify your savings since they are backed by the full faith and credit of the United States. They won’t make you rich but they have a lot of nice benefits (deferral of gains, no state and local income taxes on the interest, and there is an exemption from federal taxes for educational use) that make them attractive. I wouldn’t put all of my money into bonds but a little bit is good as a safety net.

11/2/10 Update: The Treasury Department announced that the fixed rate component on Series I bonds will be 0.00% for bonds issued November 2010 through April 2011.

That being said, I like Series I bonds the most because they offer a protection against inflation. With the release of inflation figures in September, we can now easily calculate what the interest rate portion of the Series I Savings Bond will be this upcoming month. The September 2010 CPI-U was 218.439 and the March 2010 CPI-U was 217.631. This yields a semi-annual increase of 0.37%.

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As we near the end of April, we also near the announcement period of Series I Savings Bond interest rates. For the uninitiated, here’s a quick recap – Series I Savings bonds are Treasury bonds whose interest rate is pegged to the rate of inflation. The rate is determined by an equation (I just use my Series I bond rate calculator) involving the bond’s fixed rate and the inflation rate, announced in May and November.

I think Series I bonds are great if you need something 100% safe and a respectable interest rate. My favorite part is that the interest is free of state income taxes plus federal if used for qualified educational expenses. If you have a short term need, like education in a few years, that you want to still accrue interest but not put in the market, a savings bond isn’t a bad idea.

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Update: The Treasury Department announced the fixed rate component on new Series I bonds would be 0.30% for the bonds issued in the next six months. Coupled with the inflation component we all know ahead of time (see below), the new Series I bond rate will be 3.36% for the next six months.

For the last six months, my Series I Savings Bonds have been earning exactly 0.00% APY interest. If you remember from the Savings Bond Foundation post, Series I savings bonds earn interest based on an equation that has both an inflation rate component and a fixed rate component.

The inflation rate component is set twice a year, November and May, and calculated based on six months of inflation data. The November rate is set based on inflation between March and September, the May rate is set based on inflation between September and March (see how that works out?).

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Between the various bailouts, rescues, and spending packages, the United States Treasury has been working overtime issuing debt. If you’re like me, you’re probably wondering how this is even possible and how the government goes about doing it. During the First World War and World War Two, we went through a similar period where the government needed to borrow a lot of money to help fund the war effort. That gave rise to the patriotic posters that called for ordinary Americans to buy war bonds to support our soldiers fighting the enemy on foreign soil. That same mechanism, public debt, is what we use today to help fund many of our programs. This makes it a prime topic for the third installment of the Foundation Series.

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For the last few months, until Congress raised FDIC insurance to $250,000, a lot of people were absolutely freaking out about their banking deposits. The largely symbolic move from $100,000 to $250,000 affected practically no one at that point but it made me wonder how the wealthy protected their liquid assets. I didn’t consult with any professionals on this but there are two very simple ways: CDARS (Certificate of Deposit Account Registry Service) and Treasury notes.

CDARS

The Certificate of Deposit Account Registry Service is something that your bank may offer and it can protect your deposits for up to $50 million. The program is very simple and essentially handles the paperwork of opening up Certificates of Deposit at multiple banks. There is a “loophole” in the FDIC insurance in that it covers you for $100,000 ($250,000 until December 2009) per person per institution. CDARS offers $50 million in protection because they open up CDs at multiple partner institutions. You could do it yourself, but they are simplifying the process and likely taking a little bit in interest to pay for expenses and make some money (I wonder how those rates compare with the best CD rates I’ve found?).

Treasury Notes

All Treasury Notes are backed by the full faith and credit of the United States government. Should that level of infinite insurance fail, the dollar would be worthless and your last concern would be over your deposits! We saw many institutions rush to put their money in short term notes when the credit crisis hit its apex a month or so ago and that was because those notes are protected 100%. As a consumer, you can buy Bills, Notes, Bonds, and Treasury Inflation-Protected Securities (TIPS) through Treasury Direct, the Treasury’s online management system.

For people like you or me, opening up a few high yield savings accounts will probably be sufficient to cover our liquid asset protection needs.

(Photo: refractedmoments)

Since I couldn’t buy electronic Series I bonds in time because of user error, I went to the local bank and purchased paper Series I bonds instead. The next step is to convert the paper bonds into electronic bonds and the Treasury Department makes that pretty easy.

Why Convert?

I’m converting because I don’t want to lose the certificate. If you lose the bond, you can always replace it by filling out Form PDF 1048 Claim For Lost, Stolen or Destroyed United States Savings Bonds but if the conversion process is easy, why risk it?

Another good reason to convert is that you’re able to redeem the bonds in any increment, you aren’t restricted to the increments you converted. The only rule is that you must redeem at least $25 and what’s left can’t be less than $25, which shouldn’t be an issue.

Lastly, after thirty years, the bonds are automatically redeemed. There’s no chance you’ll find the bonds in the attic somewhere in sixty years, after missing out on thirty years of interest. (there are more reasons and I just realized they have them listed on the SmartExchange site, so check them out there if you’re not convinced)

How To Convert

The system TreasuryDirect uses is called SmartExchange. Anyone with a TreasuryDirect account can convert paper bond certificates into electronic bonds (if you don’t have a TreasuryDirect account, open one… it’s easy but it takes a week or two to get everything all set up).

The next step is to log into your account and use their Contact feature to notify TreasuryDirect that you’d like to convert your bonds. Then, after a few days you’ll receive this email confirmation:

Hello.

You can now create your own conversion linked account by following these steps:

* Access your TreasuryDirect account.
* Click the ManageDirectsm tab.
* Select the “Establish a Conversion Account” option from the Manage My Linked Accounts menu. The Establish a Conversion Account page will display. Review the information.
* If you wish to create a Conversion Linked Account, click the Create Account button

The next few instructions are just as the email describes except instead of looking for a “Establish a Conversion Account” you’re actually looking for “Establish a Conversion Linked Account.” On that next page, click on Create Account and with that, you have created a Conversion Linked Account! (* Welcome to your new Conversion Linked Account! You may begin converting your paper bonds at any time. Yay!)

The process from here is simple and mechanical with detailed instructions available on the TreasuryDirect site in the ManageDirect page. You will essentially create a list of bonds, print out a manifest, and mail in the bonds (there’s no point in me republishing the actual details, they give step by step instructions). The process takes about three weeks once they get the bonds and you can track it by viewing your electronic manifest through ManageDirect. Use that to track the status of your bonds.

As an aside, having logged into TreasuryDirect about a million times in the last few days, I have to say the security access card is a pain in the rear. Luckily if you fail too (3?) many times (I kept forgetting to pick a serial number), they report that you failed but don’t actually lock you out. You can just keep trying, great security!

(Image by joan_thewlis)

I recently purchased a bunch of Series I Savings Bonds because of the favorable fixed interest rate (1.20% if you managed to score some in April 2008) and the favorable future inflation-pegged interest rate (~2.4%). The Series I is popular because you do get to lock in both a fixed rate plus an inflation based rate. The fixed portion is set when you buy it and the inflation portion is pegged to CPI-U. If you can get protection against inflation through a Series I, why does a Treasury Inflation-Protected Securities (TIPS) even exist?

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